Looking at the production costs…
As I explained in my last blog post, the too high margins that BigRazCo takes on its premium razors impacts the operational profit of BigRazCo itself and is the rationale behind the incredibly high price that BigShark paid for acquiring BigRazCo in 2005.
In today’s blog post, I would like to dive with you in the production costs of a Razor Blade and prove, from there, that profit margins are too high. Not anyone can produce qualitative razor blades. In total we have identified 5 major players. Three of them produce razor blades for “private labels” and two produces their razors and razors blades under the very well known shaving brands. One of these two is: BigRazCo.
Many years before it has been acquired, BigRazCo was convinced of infringing competition law in EU, by creating, tough buying shares of its main competitor in Europe, a real razor and razor blades monopoly. In the explanation of the judgment, some hints about production costs were revealed: at that time, the minimum investment to produce a de novo model was estimated to 150 million Euros, creating a huge barrier to entry. (Judgment said that given to the high barriers to entry, BigRazCo would have gained an inexpugnable monopoly position if investment in competitor was accepted under EU law).
It is indeed quite difficult to produce razor blades. You need special steel, for example. The “razor edge” is difficult to obtain (The razor egde reaches 300 angstrom in thickness, making it just 30 times larger than atoms size only…) and you need a special quality of steel (with more carbon in it), that, apparently, only one steel producer produces (see on on my next blog post). But, is it so expensive that it explains the price?
Certainly not. The barrier to entry explains the prices. The recent very good news issued by BigShark (A news that I will –honestly-celebrate in a next blog post), the owner of BigRazCo, to launch a razor at 11 cents (45 times lower price than the price of a premium razor in Europe) as retail price in India provides you also with some hints.
But let’s dive into the maths. Imagine a new razor blades producing plant aimed at serving Europe and that costs 150 million Euros (With share of production costs included). Consider now that this factory produces 1 billion razor heads per year. This would not be enough to cover market needs for BigRazCo blades in Europe; as a “Back of the envelope” calculation suggests: Based on EU population, and considering the market share of BigRazCo in Europe and the frequency cardrige refills, a least 1,3 billion blades are needed. But, let’s keep my figures: by using them, we get to an investment cost per blade of 15 cents, just for the first year after opening the plant. Keep now this figure in mind: you could use to check if we can believe the figures I am presenting now:
Last year, the Dailymail online issued an article where the production costs of blades were revealed. Thanks to this article, I was able to produce the graph here-below:
This graph is adapted from an analysis published by Sean Poulter. (No hyperlink is provided as the true name of BigRazCo is mentioned in the original article. But, you can still search Google if you want: “Sharp practice”? The razor heads that cost just 5p to make”). Here is how I established the graph: The retail price in UK of the premium razor I have in mind is 2,43 GBP, which, converted in Euros, makes 2,91 EUR. But, in continental Europe, razor heads are costlier (less competitive market). It can reach up to 4,50 EUR per razor head (The new model coming soon is even more expensive). I took the average price in Belgium - 4.05 EUR per razor head- based on our store checks, and applied the UK cost structure. Hence, the figures featured in the graph should be considered as approximate figures only as, for example, VAT differs from one country to the other.
What to learn from this graph? At first, you should ask yourself: Should I believe these figures? That’s what I asked myself: Is Sean Poulter not exaggerating? I am afraid not…but I am not sure. Hence, I will continue my quest for the truth… (I promise you!). But, and that’s what you have to learn from such kind of “Maths of shaving” exercise: Even if Sean Poulter or I was wrong by a factor of 2, profit margins would still be extremely high!
And now, let’s calculate the margins in percentages. The figures on the graph means that BigRazCo takes a 65% profit margin (with which you still need to pay the marketing costs, part of the salaries of football, tennis and golf stars, etc…). Even half of this sum would already be a large number! Let’s now make the reasoning in “mark up”: divide the profit margin by the sum of “production costs” and “packaging costs”. What do you get? A mark-up of 2245%! Good business to be in, no?
Margins on razor blades are much too high. That’s what I wanted to show.
CQFD.
More shaving maths later (Don’t miss the last “Maths of shaving” episode…).
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